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5 Small-Cap Bank Stock Plays for 2013 From Credit Suisse

NEW YORK (
TheStreet) -- 2012 has been an amazing year for large-cap bank stocks, but investors might find greater safety and growth opportunities in a select group smaller names during 2013, according to Credit Suisse analyst Matthew Clark.

Playing the large-cap banking names that underperformed in 2011 has certainly been a winning strategy during 2012:

Shares of Bank of America (BAC - Get Report) were up a whopping 102% year-to-date though Wednesday's close at $11.19 following a 58% drop during 2011. The shares were still down 15% since the end of 2010. The shares trade for 0.8 times their reported Sept. 30 tangible book value of $13.48. Despite the continued discount to book, the shares look pricey in the current environment for large-cap bank stocks, trading for 11.6 times the consensus 2013 EPS estimate of 96 cents, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.25, as analysts expect CEO Brian Moynihan's "Project New BAC" expense cutting program to bear fruit, while credit quality continues to improve. Bank of America also looks to be a capital return story in 2013 following the next round of Federal Reserve stress tests, since the company met its fully phased-in Basel III Tier 1 common equity ratio requirement of 9.0% as of Sept. 30.

Citigroup (C - Get Report) was up 50% year-to-date through Wednesday's close at $39.45, following a 44% decline during 2011. The shares trade for 0.8 times their reported Sept. 30 tangible book value of $52.70, but are considerably cheaper than Bank of America on a forward P/E basis, at 8.5 times the consensus 2013 EPS estimate of $4.65. The consensus 2014 EPS estimate is $5.13. Citi is also looking to capitalize on expense savings and reward faithful investors with a significant return of capital in 2013, through an increase in the dividend on common shares, as well as buybacks.

Shares of Regions Financial (RF) of Birmingham ,Ala., were up 65% year-to-date through Wednesday's close at $7.05, following a 38% decline in 2011. The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.2 times the consensus 2013 EPS estimate of 77 cents. The consensus 2014 EPS estimate is 82 cents. It's been a year of transition for Regions, with the company with the sale of its Morgan Keegan subsidiary in the first quarter, followed by a common equity raise and the company's second-quarter redemption of preferred shares held by the government for assistance received during 2008 through the Troubled Assets Relief Program, or TARP. Credit Suisse analyst Craig Siegenthaler in November estimated that following the stress tests Regions will be approved to raise its quarterly dividend from a penny to four cents, and to buy back $249 million worth of shares during 2013.

SunTrust (STI) of Atlanta was up 63% through Wednesday's close at $28.56, following a 40% decline during 2011. The shares trade for 1.1 times tangible book value, and for 10.5 times the consensus 2013 EPS estimate of $2.72. The consensus 2014 EPS estimate is $3.01. SunTrust during the third quarter made several moves to shore up its balance sheet and capital ahead of the stress tests, including the sale of its stake of Coca-Cola (KO), resulting in a pre-tax gain of $1.9 billion. Bank of America Merrill Lynch analyst Erika Penala on Nov. 26 estimated that SunTrust in March would be approved to increase its quarterly dividend from a nickel a share to 15 cents, while also repurchasing $565 million in common shares during 2013.

While most of the largest U.S. banks seemed primed for significant increases in dividends on common shares and/or buybacks during 2013, this may already be baked into the share prices. The industry is also facing continued pressure on
net interest margins, with the Federal Reserve last week saying it would continue its "
highly accommodative" policies to keep short-term and long-term interest rates at historically low levels "at least as long as the unemployment rate remains above 6-1/2 percent." The large banks will be looking for the mortgage refinancing wave to make up for the lost interest income.

Small banks of course face the same margin pressures as their large competitors, but Clark on Wednesday said "we continue to believe a premium valuation is appropriate for the SMID-cap banks based on takeout potential, stronger growth prospects, fewer one-time charges, less regulatory scrutiny, and lack of direct exposure to the Eurozone."

The analyst said he was favoring "niche growth lenders where outsized market share opportunities persist and select situations where earnings levers still exist."

Here are the five small and midcap bank stocks that Clark rates "Outperform," ranked by ascending upside potential, based on his price targets:

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